Chris Bailey, European Strategist, Raymond James Euro Equities*
“Emerging markets are hugely important” James Dyson
In the world of emerging market investments it tends to either be feast or famine. Whilst the second half of 2016 and especially 2017 proved to be the latter, the first half of 2018 has proved to be somewhat more challenging. And it has not mattered one iota if you are an equity, fixed income or local currency investor – all have struggled at an aggregate emerging markets index level.
As with anything in the world of investments, there is the general and there is the specific. The biggest general (negative) influence on emerging markets during 2018 has been the appreciation of the US dollar. There are many reasons why emerging markets do not like a rising dollar, from higher interest rate burdens on dollar-denominated debt, to (typically) lower commodity sale prices plus the general tightening of global liquidity a higher dollar tends to stand for. During 2018 the higher dollar has also reflected a defensive shift by some international investors worried about rising trade tensions. Key emerging markets such as China and Mexico have been in the direct firing line of the ‘fair trade’ rhetoric and wishes of the US administration, a reality which has intensified concerns. Beyond investors booking some profits and dollar/trade issues, specific issues across a number of intermediate sized emerging markets have had an influence. Argentina requested formal assistance from the International Monetary Fund (IMF), whilst Turkey’s combination of deficits and inflation led to high volatility. Both Russia and Iran have been impacted by economic sanction decisions led by the US administration whilst Brazil, Hungary and the Philippines have seen their local stock markets move into bear territory (a fall of 20%+).
The local Chinese stock market has also been flirting with bear market territory as the last thing the world’s biggest emerging market needs is a slowdown in the rate of its economic growth. As noted above, trade concerns have started to impact the country and this has the capability to put pressure on China’s ability to keep changing at a breakneck speed and hence, in turn, being the world’s largest consumer at-themargin of many commodities.
However it is not all about demand… sometimes it can be about change too. Despite trade concerns, lowered expectations and specific country level disappointments, the biggest positive for emerging markets today remains the journey from a ‘frontier’, to ‘emerging’ and finally a ‘developed’ economy. Themes centred on urbanisation, the growth of a middle class, heightened consumerism, more effective and less corrupt government, among many others still provides a heady strategic attraction which any international investor with a mediumterm outook still really needs to be exposed to. Additionally, current valuation levels for both emerging market equity and debt markets look attractive against more developed market equivalents. Meanwhile, sentiment surveys show waning investor attraction towards emerging markets boosting the attraction for more contrarian minded investors.
By definition it can be hard to generalise about an area as diversified as emerging market investment. However, thinking at an index level, tactically, trade rhetoric and realities and the level of the US dollar will prove highly influential over the balance of this year for the area. With many emerging markets – especially the influential China – showing a stronger commitment to economic reform and change than their developed market cousins, investor caution should only really extend so far. Today I would rate broader emerging market indices as offering more opportunity than threat.
You can read more articles from Chris Bailey and the Raymond James Investment Strategy Committee in the July edition of Investment Strategy Quarterly
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